Are you up to speed on CARES (Coronavirus, Aid, Relief and Economic Stability) Act changes that impact your business? One change that may still be an area of confusion is Section 461, or the excess business loss limitation, which has been retroactively suspended. You may remember an earlier blog from us on this- Excess Business Loss Limitation: What You Need to Know. Let’s delve into this provision.

What is the excess business loss limitation?

Check out our blog for all the details, but essentially, as part of the 2017 TCJA, Congress amended Section 461 of the Internal Revenue Code (IRC) to add subsection 461(l) which eliminates the ability of individuals, trusts, and estates to deduct trade or business losses greater than $250,000 in any tax year that begins after December 31, 2017. For married individuals filing jointly this limitation is doubled to $500,000. The limitation is indexed for inflation and will be $255,000 ($510,000 for joint filers) for the 2019 tax year and $259,000 ($518,000 for joint filers) for 2020.

NEW- CARES Act Changes

The CARES Act retroactively eliminates the excess business loss limitation for tax years 2018 and 2019, and instead defers its effective date to tax years beginning after December 31, 2020.

This means that taxpayers who have been facing an unfavorable excess business loss limitation for tax year 2019 will no longer be subject to that loss limitation. As our blog, How does the CARES Act Impact Net Operating Losses? mentions, if this loss creates a net operating loss (NOL) in 2018 the Act allows the loss to be carried back (though you still have the ability to waive the 5 year carryback).

Computation changes

Once the limitation on excess business losses returns in 2021, the computation will change also, according to two notable changes in the Act.

1. Technical correction- Any excess business loss shall be “determined without regard to any deductions, gross income, or gains attributable to any trade or business of performing services as an employee.” This means W-2 wages are not business income for purposes of the excess business loss limitation.
2. Technical correction- When computing an excess business loss, net capital gains (not losses) attributable to a trade or business are taken into account, but they will be limited to the taxpayer’s overall capital gain net income. Thus, taxpayers can no longer convert capital losses into NOLs.

What challenges, if any, will these changes present?

Though the technical changes to the computation of excess business losses were anticipated, the retroactive deferral until 2021 is expected to create some immediate issues for taxpayers and practitioners. Affected taxpayers who have already filed their 2018 or 2019 returns should consider amending their returns to eliminate the loss limitation.

*Remember, the CARES Act suspended the law retroactively from 2018-2020. In theory it should return for 2021 if no other congressional action is taken

Contact us for advice on your particular business situation.